IBM Earnings Up Over Q1, But Still Point to Weak Market

IBM is generally considered the weather vane for the global tech industry and after last night's release of its Q2 figures it was firmly pointing to unsettled weather ahead for everyone. The figures were slightly better than those of Q1, but they were still well down even if the company bravely raised its forecast for the entire year.

There were a number of elements that financial analysts were looking for in this set of figures and while some sunny spots could be found in some of its businesses segments, the figures show that, globally, the IT market is stagnant at best, and flat-lining in some cases.

However, the fact that CEO Ginny Rometty and Mark Loughbridge put a brave face on it, telling those listening in to the earnings conference call last night that everything would turn out right by the end of the year, seemed to convince the markets that H2 might be better and shares rose 2.21% to US$ 198.85 in extended trading.

Slowing Sales

The problem for IBM this quarter has been a general fall off in sales globally. In North America they fell by 3% to US$ 10.7 billion, while EMEA (Europe, Middle East, Asia) was stagnant with sales of US$ 7.8 billion, as were the BRICS (Brazil, Russia, India, China, South Africa) countries.

Overall, sales were down in Q2, which ended June 30, by 3.3% or US$ 24.9 billion, but still better than Q1 where sales were down 5.1 percent. Net income was down too on the year, this time by 16.9% to US$ 2.23 billion, including the US$ 1 billion spent on lay-offs, but compared with Q1 it was up 6.6% from US$ 3.03 billion.

None of this makes pretty reading at face value, but there are a lot of rough diamonds in the mix that could easily mature into polished gems by the end of the year.

Layoffs, Divestitures

The first thing to note is that over the course of the quarter, and in keeping with what was said following the Q1 figures, IBM laid-off a large number of workers, the cost of which ate into its profits to the tune of US$ 1 billion.

The exact number of lay-offs was not discussed, but they were mainly from outside the US with 60% from the services division and 20% each from its hardware and software segments.

The impact of those costs on the balance sheet will not be felt until Q3, Chief Financial Officer Mark Loughbridge said, and it is not clear whether there will be more lay-offs in the coming quarters.

The other sign that analysts were waiting for was an indication of what part of its business it is going to divest and when that might actually happen.

IBM never confirmed these rumors, although Lenovo would be an obvious candidate, having bought IBM’s PC business in 2004. The deal was widely expected to happen sometime in 2013. It now appears to be on the back burner and will most likely not happen until next year at least.

We are still in active discussions … We are not going to rush an M&A or divestiture just to close in 2013," Loughbridge said during the conference call.

He also indicated that Big Blue will be looking to sell off other parts of the business and that those gains would be included in its financial guidance for 2015.

Cited on Reuter’s news agency, Brian Marshall, an analyst at ISI Group, has estimated that this could bring in US$ 2 billion to US$ 3 billion when it finally happens.

IBM Sales

Digging a little bit deeper into the figures, there are other nuggets worth noting that explain why IBM has raised its financial forecast for the year.

Loughbridge indicated that in the services and software space things were starting to perk up a little with only around half of its current US$ 400 million + contracts actually closed over the quarter. These deals should typically close in the second half of the year

The Systems and Technology group also did better if not well, and is now starting to make money again with sales down 11.8%, or US$ 3.76 billion. If not what IBM would like, it is still better than the 17% hit in Q1 and shows that it is moving in the right direction. Keep in mind here that in Q2 2012 this segment made US$ 234 million in pre-tax profits.

Analytics, Cloud in H2

Matthew Casey, an analyst with Technology Business Research, said that while things have been difficult over 2012, IBM’s acquisition strategy with a focus on core software and analytics is beginning to pay off.

During 2Q13, IBM Software began to show positive results from this strategy (4.1% year-to-year revenue growth, the highest growth for software since 1Q12), setting the stage to continue driving top-line growth, led primarily by these acquisition driven initiatives …” he said.

The result, he says, is that though core businesses were key in Q2, over the coming half, growth will be related to acquisition related businesses, most notably Kenexa and SoftLayer.

He added that IBM's increased guidance for analytics revenue has indicated that Big Blue is ahead of its projected pace of development in this area and that it has been building its portfolio in this space to ensure continued growth through to 2015 at least. Interesting H2 ahead for IBM.

CMSWire is a leading, native digital publication produced by Simpler Media Group, Inc. We provide articles, research and events for sophisticated professionals driving digital customer experience strategy, evolving the digital workplace and creating intelligent information management practices. The CMSWire team produces 450+ authoritative articles per quarter for our 750,000 community members. Join us as a subscriber.